Dividend Investors: Don’t Panic!

by Marc Bastow | November 7, 2012 11:52 am

Dividend Investors: Don’t Panic!

Now that Election Day is right behind us, we get to watch the emotions spill out from the electorate. Depending on which lever you pulled, you might be elated, hopeful, concerned, worried or downright despondent.

But there’s one emotion that retirees and those planning for retirement should avoid altogether: panic.

Specifically, don’t hit the panic switch on your income investments. Grab a cup of coffee and prepare yourself for some changes … just don’t panic.

Dividend income — and more importantly, how that income is taxed — is going to be on the tax reform table in the future, along with other staples of retirement planning life, such as tax-exempt bonds[1], tax shelters and capital gains taxes.

We’ll leave those other topics for another day. For now, let’s focus on two important numbers concerning dividend income:

15%: The current federal taxation rate for dividend income.
39.6%: Where that tax rate might be headed[2].

Tax changes are coming, but not tomorrow. Washington still is caught up in partisan politics, and the rancor and hard feelings left over from the campaigns aren’t going away soon.

Sooner or later, though, Congressional leadership will have to come up with a fiscal plan, and it might include tax hikes on dividend income. While 39.6% — the pre-Bush tax cut rate — is the much-ballyhooed worst-case scenario for individuals and couples earning more than $388,350, I think something in between is more likely.

That said, a higher rate might stink, but you still are accruing income. And with money markets and CDs paying you virtually nothing anyway, a dividend — whether it’s taxed at 15%, 20% or even 25% — still should end up being a better income-generating option than anything else out there.

So hang on to those dividend stocks you’ve accumulated and embraced for their safety, strength and ability to pump out quarterly income like clockwork.

Old-line stalwarts like Exxon Mobil (NYSE:XOM[3]), Procter & Gamble (NYSE:PG[4]), Johnson & Johnson (NYSE:JNJ[5]) and McDonald’s (NYSE:MCD[6]) not only aren’t going anywhere, but they have a history of consistently paying and increasing dividends over time[7], making them even more attractive amid pending tax hikes.

Even tech stocks — including Microsoft (NASDAQ:MSFT[8]), Intel (NASDAQ:INTC[9]) and Apple (NASDAQ:AAPL[10]) — offer opportunities for the long-term, too. Not just because technology is driving consumer behavior[11] toward buying products again, but because the industry is outpacing numerous sectors in terms of dividend growth[12]. Not to mention, the three companies above have gazillions of dollars to keep writing checks against.

Your dividend income might become even more important if IRA rules are adjusted, or as Obamacare is implemented starting in 2013 — both of which could result in added costs. Don’t flub it by making an irrational choice based on tax implications.

If you like your investments, keep them. Then just wait for further instructions from the IRS.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long XOM, JNJ, AAPL, MSFT and INTC.